On June 3 2015 the New York State Department of Financial Services (DFS) released its final BitLicence rules.(1) The DFS issued its original draft rules on July 17 2014 and a revised version on February 4 2015.(2) Nearly all of the changes in the final rules are of a technical or clarifying nature.
However, the final rules eliminate the obligation of a virtual currency business (VCB) to file currency transaction reports and suspicious activity reports with the DFS where such reports must already be filed with the federal government. Also, the final rules clarify that a VCB needs to obtain prior approval from the DFS only for any new "material" product, service or activity, rather than for all new products, services or activities. In addition, the final rules clarify that for the purpose of obtaining DFS prior approval for a change in control, no person is deemed to 'control' a VCB merely by serving as an officer or director of the VCB.
The final rules slightly broaden the scope of items that constitute virtual currency by narrowing the carve-outs to the definition. First, the previous drafts of the BitLicence rules carved out digital units that were redeemable for "goods, services, discounts or purchases". However, the final rules clarify that these digital units must now be part of a "customer affinity or rewards program" or else they will be deemed to be virtual currency. Second, virtual currency also excludes "digital units used as part of Prepaid Cards". However, the final rules changed the definition of 'prepaid cards' (referred to as 'gift cards' in the previous drafts) to include only those products that are issued or redeemable in legal tender; the previous drafts did not specify that prepaid cards had to be issued and redeemable in legal tender.
DFS guidance and speech
DFS Superintendent Benjamin Lawsky gave a speech to the BITS Emerging Payments Forum on June 3 in connection with the release of the final rules.(3) He offered additional guidance in his speech. Some of this guidance clearly corresponds to the changes in the final rules, while other points may provide new context:
- Some VCBs had expressed concern that under the BitLicence and money transmitter rules, VCBs will be subject to duplicative requirements, such as capitalisation and record-keeping obligations, for the same activity. In response, Lawsky stated that the DFS will not require a duplicative set of application submissions for VCBs that want to obtain both a BitLicence and a money transmitter licence, and that VCBs will be able to cross-satisfy many of the requirements that are common to both licences. However, it is unclear whether Lawsky intended to limit this point to those requirements common to the application process or whether he intended that VCBs also may cross-satisfy common, ongoing obligations.
- Lawsky emphasised that the DFS has "no intention of being a regulator of software developers—only financial intermediaries". Previously, some industry observers expressed concern that the proposed BitLicence regulations would inhibit innovation. However, Lawsky explained that a BitLicence is not required for "simply developing software" if the entity is "not holding onto customer funds".
- Some industry observers had expressed concern that the proposed BitLicence regulations would deter investment and venture capital funding. In response, Lawsky explained that the regulations are not targeted at "passive investors" and that "companies also would not need prior approval from DFS for every new round of venture capital funding. Generally a company would only need prior approval if the investor wants to direct the management and policies of the firm (which is known as a 'control person' in regulatory jargon)". However, while non-controlling investors will not need to obtain prior approval, Lawsky suggested that they should document and demonstrate that they will not have a controlling role.
- As noted above, Lawsky reiterated that VCBs will need to obtain the DFS's prior approval only for "material changes to their products of business models", but not for any "standard software of app updates".
- As noted above, Lawsky stated that VCBs that are required to file suspicious activity reports with federal regulators will not have to file duplicates with the DFS. However, he did not fully address the issue that VCBs may still be subject to other duplicative requirements, such as those applicable to New York money transmitters.
The final rules will become effective on publication in the New York Register.
For further information on this topic please contact David E Teitelbaum or Joel D Feinberg at Sidley Austin LLP by telephone (+1 202 736 8000) or email (firstname.lastname@example.org or email@example.com). The Sidley Austin website can be accessed at www.sidley.com.
(1) The final rules are available on the DFS website.
(2) For further details please see "New York DFS publishes revised BitLicence regulations" and "Licensing requirements for businesses engaged in virtual currency activities proposed". A redline comparing the final rules to the version released on February 4 2015 is available here.
(3) A transcript of the speech is available on the DFS website.
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